Comment On Krugman On neo Fisherites

Paul Krugman wrote

the “neo-Fisherite” view that lower interest rates lead to lower inflation [skip] why doesn’t this debate emphasize the large empirical literature on the effects of monetary shocks?


I mean, this is largely what Chris Sims got his prize for. It’s about as close to a fully established empirical result as we have in economics.


What I think happened here was actually that some economists said something silly, not out of deep conviction, but because they weren’t really thinking about what their equations meant; and that rather than back off, they have now spent the past few years trying to justify their initial claims.

(note how the allegedly undiplomatic Paul Krugman doesn’t name those economists).

I have little useful to add, but here is my comment. As usual, I think Krugman is a bit too moderate.

I think there is some interest in the episode (although I am not sure that figuring out what it means is worth the increasing price — sorry Fishering for a pun there).

The crazy idea comes from the assumption that the economy always must be on a balanced growth path. This is one of the implausible standard assumptions (along with rational expectations and all that). In academic work it is clearly stated as a limit of the analysis, but some economists sometimes forget the caveats.

I think the assumption that all properly scaled real variables go to unique steady state values is the policy relevant implication of modern macro. It requires the assumption that no monetary policy can lead to hyperinflation or a liquidity trap. It is nonsense and it is central to the whole enterprise.

The Fisher silliness is a very clear example of this. The belief that Central Banks should target inflation and inflation only is a more important result of forgetting that an assumption made for convenience is an assumption made for convenience.